Rental demand in Twin Cities stays high

Twin Cities apartments are being rented as fast they're going up. At least for now.

Despite an apartment construction boom underway locally, the vacancy rate has barely budged, according to a new report from Marquette Advisors. The number of unoccupied units rose slightly to 2.8 percent at the end of the third quarter while monthly rents also rose 2.8 percent to $951.

With more than 1,000 new units in the mix, some observers had expected demand for apartments to soften.

"I was pleasantly surprised," said Lisa Moe, CEO of Stuart Cos., a large Twin Cities-based apartment developer and manager. With more than 14,000 units proposed for the Twin Cities, Moe and other rental experts say that higher vacancy rates are inevitable. But when that happens depends largely on how many units actually get built and the pace of the economic recovery.

For now, the rental market in the Twin Cities and beyond has been one of the few economic bright spots during the housing crash, buoyed largely by a fundamental shift from the pursuit of homeownership to renting. Since the beginning of the downturn, the homeownership rate has fallen from record highs as an increasing number of people became renters by choice. At the same time, strict mortgage lending requirements and economic hardship forced many would-be buyers into rentals, often sharing them with friends and family.

Such forces converged on a rental market that saw very little new construction over the past decade. Friday's numbers, which don't include small buildings, subsidized and low-income rentals, suggest that developers can't build apartment buildings fast enough.

Marquette Advisors Vice President Brent Wittenberg said that in 47 out of 54 sub-markets tracked by his survey, the vacancy rate during the third quarter was below 3.5 percent, but much lower in some areas. The offerings are most limited when it comes to studio and one-bedroom apartments, which had an average vacancy rate of 2.2 and 2.4 percent, respectively.

With an economic recovery underway, the rental market is struggling to absorb the growing number of people who share an apartment with a friend or relative who can now move into their own place, or who are able to upgrade to a nicer, newer apartment like the ones that StuartCo recently opened in Bloomington and New Brighton. The last phase of the Genesee opened last month and is already 50 percent leased, which is ahead of schedule. The first two phases of the project are full, and Moe expects the last one to fill by early next year.

"I think we're going to see it change," Moe said, noting that she's already seeing some landlords offer rental concessions to encourage traffic. Those inducements are not widespread, or as generous, as they were during the housing boom, but they are an indication that the market is moving into balance in some areas.

The market continues to be the most competitive in Minneapolis, where the average vacancy was 1.6 percent compared with 2.8 percent in St. Paul. That's why Minneapolis has been the primary focus of proposed development activity. In recent weeks there's been movement on several high-profile projects. Last month Chicago-based Magellan Development closed on its construction loan and will start building a luxury high-rise in the Loring Park neighborhood. And Minneapolis-based Schafer Richardson is in the early stages of planning an apartment building that will replace the venerable, but out-of-business, Totino's Italian Restaurant in northeast Minneapolis.

Across the metro, the market has absorbed 1,164 new rental units through the end of the third quarter. During the fourth quarter alone, 393 units are expected to hit the market.

"Both urban and suburban developments have been well received," Wittenberg said.